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  • Powell expected to be appointed as new Fed chair today
  • Fed leaves rates unchanged but rate hike at the next meeting is a virtual certainty
  • Delayed House tax bill expected today
  • Unemployment claims expected to show continued labor market strength
  • U.S productivity expected to improve thanks to strong GDP
  • BOE rate hike expected today

Powell expected to be appointed as new Fed chair today -- President Trump this afternoon will officially nominate Fed Governor Powell as the new Fed Chair starting when Ms. Yellen's term expires in February, according to a WSJ story late Wednesday afternoon.  Yet, there is also the possibility that Mr. Trump could throw a bit of a curve ball to the markets by announcing that Mr. Powell is the new Fed Chair, but that he is also appointing John Taylor as Vice Chair or as a regular Fed Governor as a consolation prize to Republican hawks who favor Mr. Taylor.  The stock and bond markets would likely view that as a bearish factor since Mr. Taylor is thought to favor a faster rise in the funds rate up to the level of about 3% that is currently suggested by the Taylor Rule.  The latest betting odds for the next Fed Chair are 90% for Powell, 4% for Yellen, 1% for Taylor, 1% for Warsh, and 1% for Cohn, according to PredictIt.org.

Fed leaves rates unchanged but rate hike at the next meeting is a virtual certainty -- The FOMC at its meeting that concluded yesterday left its funds rate target unchanged at 1.00-1.25%, which was in line with unanimous market expectations.  The Fed upgraded its assessment of the economy to "solid," which reinforced market expectations for a rate hike at the next FOMC meeting on Dec 12-13.  The market is discounting a 98% chance of that December rate hike, according to the Jan 2018 federal funds futures contract.  The Fed dots are still forecasting three +25 bp rate hikes in 2018, but the markets are discounting only another 31 bp of rate hikes in 2018, i.e., a little over one +25 bp rate hike.

Delayed House tax bill expected today -- House Republicans say they will release their tax bill today after a 1-day delay.  The markets are eagerly waiting to see the details of the House bill to gauge (1) the odds of its passage in the House and eventually the Senate, and (2) the extent to which the plan will drive the national debt higher in coming years.  House Speaker Ryan will try to jam the House tax bill through his caucus with as few changes as possible in order to meet his goal of passing tax reform within the next three weeks before Thanksgiving.  The tax bill is likely to have more trouble in the Senate than the House since Majority Leader McConnell can afford to lose the support of only two Senators in order to sustain a majority vote.  Congressional Republicans are still aiming to get a bill passed and to President Trump's desk by Christmas.

The betting odds remain slim at 29% for a signed bill by year-end, according to PredictIt.org.  However, the odds in our view are more like 70% for a deal by early 2018 since passing a tax bill has potentially become an existential issue for Republicans.  The complaints among Republicans are mainly on the pay-for side and Republican leaders can keep watering down the tax cuts, or make the tax cuts temporary, until they adequately match what they can push through on the pay-for side.

Unemployment claims expected to show continued labor market strength -- The initial claims data has shaken off hurricane disruptions and is again illustrating a strong labor market.  The initial claims series is only +10,000 above the new 45-year low of 223,000 posted in the week ended Oct 13.  Meanwhile, continuing claims in last week's report fell to a new 44-year low of 1.893 million.  The consensus is for today's initial claims report to show a +2,000 increase to 235,000 (after last week's +10,000 increase) and for continuing claims to show a +1,000 increase to 1.894 million (after last week's -3,000 decline).

On the labor front, the market is mainly looking ahead to Friday's Oct payroll report, which is expected to show an increase of +312,000, thus rebounding higher from Sep's hurricane-induced report of -33,000.  Before the hurricane disruptions, payroll growth was respectable in June-Aug with a 3-month average of +172,000.  Expectations for a solid payroll report on Friday were bolstered by Wednesday's news that Oct ADP jobs rose by +235,000, which was mildly stronger than market expectations of +200,000.  The consensus is that Friday's Oct unemployment rate will be unchanged at 4.2%, maintaining Sep's -0.2 point decline to that 17-year low.

U.S productivity expected to improve thanks to strong GDP -- The consensus is for today's Q3 non-farm productivity report to show a relatively strong increase of +2.6%, up from +1.5% in Q2.  The expected Q3 productivity report of +2.6% would be the second best level in 2-1/2 years and would be due in large part to the fact that Q3 GDP was strong at +3.0%, bolstering the output numerator in the productivity ratio.

BOE rate hike expected today -- The markets are discounting a 90% chance that the Bank of England at its regular policy meeting today will raise its policy rate by +25 bp to 0.50%.  That would reverse the -25 bp rate cut that the BOE implemented in Aug 2017 in order to provide some insurance against the turmoil that resulted from the Brexit referendum vote in June 2016.  The BOE now is under pressure to reverse that rate hike due to the surge in inflation that has resulted from the Brexit decision and the ensuing weakness in sterling.  The UK CPI in September reached a 5-year high of +3.0% y/y and the core CPI in Aug-Sep was at a 5-3/4 year high of +2.7% y/y.

However, today's rate hike may turn out to be "one and done" since UK consumer spending is weak and since there are many uncertainties still to come from Brexit.  Little progress has been made in the Brexit negotiations and there is still a chance the UK may crash out of the EU without a trade agreement when the UK is automatically ejected from the EU in March 2019.

 

 

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